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None Dare Call It Extortion

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What do you call it when one person threatens violence against another unless he obeys? How about “extortion”?

Consider this sentence from the New York Times on Christmas day: “Brandishing new data showing that the drug industry earns higher profits and pays lower taxes than most other industries, White House officials say drug companies may bring price controls on themselves if they continue to resist President Clinton’s plan to have Medicare provide pharmaceutical benefits.” The story went on to explain that a Clinton administration budget official, offering a “personal view,” said that antagonism toward the industry could be the impetus for price controls on medicines. It was an odd personal view. First, the official, Daniel N. Mendelson, associate director of the Office of Management and Budget, said unnamed others in the White House hold the same view; and second, he “spoke as an official representative of the Clinton administration.”

Thus it is reasonable to conclude that President Clinton himself is behind this threat against the pharmaceutical companies: get on board with the Medicare plan or else.

The irony is that the plan would bring price controls anyway. The federal government would become the buyer of all prescription medicines used by the elderly. Anyone who thinks that wouldn’t give the government the power to set prices hasn’t thought about the matter. Under Medicare the government already sets prices for medical services. It’s one reason that doctors increasingly are refusing to see Medicare patients.

Economic theory and about 4000 years of experience with price controls lead to one inescapable conclusion: they create shortages. In a free market, entrepreneurs are limited by the competitive process in what they can charge for their products. If the market price for a product is too low to enable an entrepreneur to bid the necessary scarce resources (labor, raw materials, and so on) away from other uses, that is a signal that consumers want the resources used elsewhere. But if consumers are willing to pay a price that covers the entrepreneur’s expenses, they are signaling that the project is worthwhile compared to alternatives. Profits are the rewards the entrepreneur reaps by noticing hitherto overlooked opportunities to serve consumers: the higher the profits, the more urgent the need that had been overlooked.

If the government imposes a price ceiling on a product below what the market would set, producers will make less of it or none at all. Moreover, the quality will suffer, as producers minimize expenses. And entrepreneurs will be discouraged from looking for profit opportunities in fields where prices are subject to government control. Resources will flow to uncontrolled areas.

This is not “only a theory.” Anyone who lived through the energy shortages of the 1970s has firsthand experience of how a product can disappear when government refuses to let the market set prices.

It is particularly outrageous for the Clinton administration to hold the pharmaceutical industry’s high profits and low taxes against it. As noted, if profits are high, it is because the companies are constantly addressing urgent consumer needs. That’s a sign of the industry’s good service. Its taxes are lower than those of other industries because the tax rules allow credits for research and for foreign taxes paid. If the authorities think it is unfair that the industry pays less in taxes than other industries do, let them lower the taxes of the others. Taxes are destructive because they stifle production.

The budget official failed to note that prescription drugs are more expensive than they need be because the Food and Drug Administration imposes expensive and idiotic bureaucratic testing rules on new products. If the government insists on increasing the amount of money that has to be invested in new drugs, don’t be surprised if producers try to recoup that money from consumers. Who else is there to pay those expenses?

If the government is really concerned about the price of medical care, it should look to its own policies, which stimulate demand and reduce supply. Medicare is a prime culprit.

There is nothing new about politicians’ threatening businesses with controls and taxes if they don’t obey. But the threat usually isn’t so open. Leave it to President Clinton to lack the shame to attempt his extortion publicly.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.